Knowledge that Transforms

Reviews the book "Accounting Procedure for Standard Costs," by Cecil Gillespie.

Accounting and auditing personnel of the U.S. Department of Defense constantly receive suggestions from accountants, from its contractors and their trade association representatives and from procurement personnel within the Department that its contracts should only place an obligation on its contractors to maintain an accounting system in accordance with generally accepted accounting principles and practices. The purpose of this article is to consider these suggestions and to indicate the accounting and auditing problems facing the Department of Defense in connection with its procurement contracts. Cost-type contracts require most contract costs be readily ascertainable. Generally accepted accounting principles provide standards for the evaluation of the financial position of an enterprise and for the measurement of income and expense over a given period of time. Fixed price contracts may also incorporate an incentive feature. Under this type of contract a unit target price is agreed upon during the initial negotiations with the contractor. The usual annual audit by independent auditors is directed toward the determination of the reliability of management's representations contained in the client's financial statements. The major audit effort is placed on balance sheet items with somewhat less emphasis on income and expense accounts.

In the July 1952, issue of the "Accounting Review,"under the title "Some Notes on the Bond Yield Problem," the author discussed the application of a modified or improved Newton's correction formula to the problem of finding the accurate yield on a bond, the improved formula having been briefly set forth in an earlier paper by Hugh E. Stelson,' who had drawn it from one of the mathematical journals. This article includes the continuation of numbers of formulas and equations herein from where they stopped in the preceding article. With serial bonds, the problem of finding the initial approximation to the yield rate is more acute than it is with a single bond. This article also discusses the matter appearing in the thirteen pages of Mr. FitzGerald's article in the "Accounting Review," for January, 1953, on accounting for variations in gross profit.

Up to the middle of the nineteenth century, most businesses were not too large or complex. They carried their inventories at cost and by the first-in first-out method. The problem was one of physical count and extension at the last invoice prices. Several authors of accounting books believed that the market values of assets should not be ignored and should at least be mentioned, probably by footnote in the balance sheet. During that time, the statement of financial condition was considered more important than the profit and loss statement, because the latter statement was merely used to prove the correctness of the change in the proprietary interest in the balance sheet. In 1929, the American Institute of Accountants reaffirmed the lower of cost or market rule for inventory valuation. In 1943, the Research Department of the American Institute made a survey of members of its Committee of Accounting Procedure for the purpose of formulating rules for inventory pricing. According to replies, it is evident that there was some agreement on application of the lower of cost or market value. However, the study reflects quite a bit of evidence indicating differences of opinion on many points in connection with that method of valuation and its application.

The presentation of the subject of installment accounting, if guided by the material of many texts, is a difficult task which too often leaves the student, at least the average student, confused. This confusion arises from the obscure relationship between the procedures and the objectives. This relationship is obscure because the usual procedures approach the objectives in a round-about fashion, and have no apparent similarity to material already mastered by the student. When the students have reached the level where installment accounting is studied, they are sensitive to procedures, for so many tests have stressed journal entries, adjusting entries, and computations. Since the procedures of accounting for installment transactions appear to differ so radically from those of ordinary transactions, the student feels that the subject matter is foreign to other accounting topics. Instruction in installment accounting should emphasize income determination, but because of procedural difficulties, stress has too often been placed on the journal entries. By following familiar patterns, procedures will be clarified and stress can be placed on the recognition of income and the circumstances existing in various businesses which serve as dues for the recognition of income.

The ultimate aim of cost finding lies in the proper usage of the figures produced. In order to make use of figures, the meaning behind them must be brought to light by analysis and interpretation. The aim of this article is to discuss some fundamentals of analysis and interpretation and to indicate some of the steps involved. Breaking up of accounts or figures has to take place since the flow of figures cannot always be set in advance so that they come "out of the mill" as ready-made analyses, usable for all purposes. Analytical work in cost and finance takes principally the shape of working papers. The working papers may integrate perfectly with the books and records of an enterprise and may be impeccable masterpieces. Creativeness should be based on facts or should lead to the gathering of other pertinent facts. Interpretation may be viewed as a catalytic process of the intellect. The analyst absorbs the analytical data and tries to bring to light the significant features behind them.

The article highlights that in problems in the mathematics of finance where it may be desired to find an unknown rate of interest, a uniformity of approach to approximation formulas of considerable accuracy can be achieved for the three fundamental functions and their inverse functions, and also for the bond function, by means of the concept of the total interest growth over the term of the investment, or indebtedness. The article presents various methods to calculate the rate of interest. The total interest, present value of annuity, amount of annuity is first calculated. By means of these relations, the article is able to make substitutions in the usual formulas, obtaining what may be termed indirect formulas, which give rise to series that converge more rapidly than the series obtained by expansion of the original formulas. The new formulas are used as the bases for approximations to the interest rate. The article also presents a table to show the formulas for the calculation of present value of annuity or installment payment problems.

In the U.S., teachers show a desire for self-improvement, parents show great determination that their children shall take advantage of the opportunities offered or citizens show great willingness to bear the necessary expense. The courses in business and commerce can now become a substantial segment of the educational fields of the country. The classes in accounting are the backbone of the business courses. Not every student is an accounting major, but in nearly every case they take some accounting subjects. The granting of the CPA certificate is a matter of law. While the possession of diplomas and degrees from accredited schools may satisfy certain requirements, the laws require that the can date must present other proof satisfactory to the Board of Accountancy that he possesses adequate skill, knowledge and judgment in accounting matters. Accounting education labors under the serious handicap of having grossly underpaid instructors. There is a continuous struggle to keep good instructors at the salaries that are available and it now appears to be impossible to acquire and keep young and alert men who are tiling to make the financial sacrifices necessary to remaining in the teaching profession. Once the standards of educational preparation are established and adopted, experience can then become a supplement rather than a substitute for education and this is how it should be regarded.

The curriculum for prospective industrial accountants might begin from either of two viewpoints. One is that of taking a conventional body of subject matter which is organized into textbooks and inadvertently presenting this material as an end in itself. Almost needless to say this approach takes the more difficult part of curriculum building for granted. Thus, the curriculum builder would only select and prescribe course titles; the instructor would follow up the routine task of presenting the "tried and the true" while keeping student interest alive and enhancing it as much as possible. The aim of each course in such a curriculum is to "give the student a good understanding of" something or other which is rarely well defined. The principal defect of this approach is its poor adaptability to the needs of a changing world. A different approach would place less emphasis on conventional course content as pertains to both subject matter and method of teaching. In the beginning there would be little apparent presumption of a fixed body of subject matter to be covered or learned, but the instructor, of course, would have an abundance of subject matter at hand. This is based partly on the belief that the candidate to a major profession cannot know long in advance much about what the later requirements of his profession will be. The student must discover these objectives as his educational development unfolds, and his opinions will not be held for long. Most of this curriculum would be prescribed with but few elective courses. Instead of subject matter to be taught, the learning process would be the focus of attention.

The article presents the author's views on an article previously published in the October issue of the Accounting Review, entitled "Limitations on the Significance of Invested Cost." Accounting is progressive; it clearly has shown that tendency in the marked development, strange to ancient usages, of its industrial and managerial aspects. A similarly far-reaching progressive development was slow to appear in auditing although that is the professional area. Still less has accounting shown a full measure of progressive development of its interpretative aspects, i.e., in the collateral work of making the results of technical accounting processes understood by more and more people. Perhaps index number adjustments are intended to constitute an advance in the latter area. And few indeed will take exception to this or any other interpretative endeavor, provided the effort does not meanwhile emasculate the well-known and still very useful data that emerge from the normal accounting process. It could hardly be progress if its price were the submerging of accounting's basic information or of yielding anything on the objectivity issue. It is not likely to prove to be progress merely to develop the new and wider areas of data to be brought within the framework of double entry, following ever farther the lead in this respect of fund accounting and standard cost accounts. There must be limits to accounting adaptability as there are limitations in the significance of "invested cost." A permanent cleavage between balance sheet and income statement (between objectivity determined real and nominal accounts) can not properly be called "progressive."